As we try and navigate our way through the impact of COVID-19, it is becoming more common for young Australians to receive a “hand-out” or a “hand-up” from their family. For those lucky enough to receive such help, it is important to think about how this money may be treated in the event of a separation.
In a family law property matter, if one party has received money from a family member, such as their parents, throughout the course of the relationship, we must first establish whether this money was intended to be a gift or a loan.
The reason this distinction is important is because if the money was a loan, it will be considered a liability of the parties and this will reduce the net assets available for distribution between the parties. There is an expectation that the party who is retaining the debt as part of the property settlement will repay the loan however, in reality, the family members who has “loaned” the money often forgives the debt after a property settlement is finalised. The effect of this is that the party who was “loaned” the money ends up receiving more of the asset pool than was intended.
If the money was a gift, then what remains of that money, or whatever was purchased with it, will form part of the net asset pool. The totality of the gift will be treated as a financial contribution by the party whose family gave the gift, and this may impact on the assessment of each parties’ contributions to the net asset pool. Factors that will decide the extent of the impact on the parties’ respective contributions include, how long ago the gift was received, and the size of the gift compared to the parties’ overall net asset pool. The larger and more recent the gift, the greater impact it will have on the recipient’s percentage contributions.
We tend to find that once parties have separated, the party who received the money generally argues that the money was a loan, as it will benefit them, and the other party generally argues that it was a gift that does not need to be repaid.
The word of the recipient or their family member is not necessarily enough to convince the Court of a loan. The Court will have regard to all the surrounding circumstances and evidence. The best evidence of a loan is having a formal loan agreement in place between the receiving party and their family member. However, evidence of regular loan repayments or interest accruing on the loan may also be enough to convince the Court it was intended to be a loan.
It is far too common that we see family members become involved in property settlements between a couple because they were trying to be helpful and provide their family member with a “hand up” or “hand out”. If you have a family member who is intending on providing you with some financial help, you should think carefully about whether this is a loan or a gift and you should seek independent legal advice about the advantages and disadvantages of both.